PSU banks, select private lenders remain attractive despite global market jitters: Chakri Lokapriya
"All this will take away the focus of the company from its core lending and borrowing business and instead focus on fixing the house. So, growth and operations is a casualty," says
Chakri Lokapriya
, CIO-Equities, LGT Wealth.
What do you make of the market set up right now?
Chakri Lokapriya:
Clearly, with the US fiscal deficits turning out to be higher, it is now almost like there will be some form of tariff impact on all the other countries, India included. Against this backdrop where we have an RBI surplus which is going to be released sometime in the next few weeks, that can help India to do defence spending, capex spending, so that will support earnings, India corporate earnings, so that is the next support to watch for and, of course, the RBI rate cut.
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So, how important is the spike in bond yields and what kind of impact do you think that could have?
Chakri Lokapriya:
The impact of that is clearly a bit unnerving at one point. So, the only thing that will help in as far as India is concerned is we should see evidence of an earnings acceleration, because so far we have seen only earnings downgrade, only then it will justify the valuations going forward.
Let us analyse some numbers and
InterGlobe Aviation
, it is, of course, a strong forecast for FY26, the management believes that all those geopolitical turbulences could very well be behind them. What is it that you anticipate in terms of where the stock could actually move from here and do you sense further upside?
Chakri Lokapriya:
InterGlobe clearly in the short to medium term is well positioned. It has a few things going in its favour which is oil is down and that is the biggest component of its raw material costs, fuel cost, and outside of that traffic growth continues to remain strong.
Live Events
And now in the traffic, in the peak season that we are going into which they do not have presence, that is the international segment, they are launching a new segment that may add some incremental bit, but not really, but just the domestic factor setup in itself the outlook for
InterGlobe
is good.
In any case, I am sure everyone must have already exited
IndusInd Bank
, but what is it that you are making of the commentary because it is not just about core profitability or that one-time adjustment of forex, but there are many one-offs which I guess have led to this massive loss that they have incurred.
Chakri Lokapriya:
You are absolutely right. In this environment when a new CEO is going to come, it is going to impact a lot of changes, operational changes, operational uncertainty within the bank on top of their existing problems of asset quality, provisioning, accounting issues. So, it is best avoided and not touch for quite some time until things settle down.
What is your view on IndusInd Bank, I mean, it just everybody knows the bad news. We know that there is a derivative laws. We know that there is a problem in MFI. And we know that there is no CEO. I mean, are markets pricing all the bad news?
Chakri Lokapriya:
I do not think so, simply because while the market might be pricing in news, what is still uncertain is about how will whoever is the new CEO, interim, how the operations are going to be run? How is it going to be cleaned up?
All this will take away the focus of the company from its core lending and borrowing business and instead focus on fixing the house. So, growth and operations is a casualty.
I was just looking at the charts of BEL and the stock is pretty much around its 52-week highs. We have seen a renewed vigour within the entire defence pack as soon as the geopolitical tensions with the neighbour actually sprung up. Wanted you to tell me that other than BEL, where is it that there is valuation comfort within purely the defence pack.
Chakri Lokapriya:
Within the defence pack, well Bharat Electronics clearly is well positioned as you say. Hindustan Aeronautics, Mazagon Dock are also looking good. These are all one-off companies in terms of not too many people can make submarines, not too many people can make aircrafts. And outside of that somehow related thing would be railways, but the simple fact that now with the increased scrutiny and border controls, it is likely to see more railway penetration across all the more sensitive areas and therefore, companies like
Titagarh Wagons
,
Jupiter Wagons
all these companies are also likely to see, given that they have corrected quite significantly.
Just wanted to understand given the market construct right now and all the dynamics at play, is there anything that you are overweight on currently or recommend buying in this market or would you say just sit back because you do not know how the global markets are really going to pan out from here while we have done okay from those March end lows, but guess this is not it.
Chakri Lokapriya:
You are right, in terms of, we have rebounded quite sharply over the last month and a half, against the backdrop of earnings not actually being cut in this current quarter but we would still be overweight financials and industrials because that is where there will be tailwinds with an RBI rate cut and eventual uptick in corporate earnings and therefore spent. So, I think those are the two areas, within that PSU banks and some of the obvious names in private banks and within industrials the EPC companies.
Also, give us some sense that what are you really pencilling in when it comes to the pharma space because just yesterday, we have seen the pharma index was actually in the pink of health and of late, it did not participate much in the kind of selloff or rather volatility that we have seen. Do you believe this still offers value and one should look at for a long-term opportunity, well of course, with earnings CDMO as a segment has done very well.
Chakri Lokapriya:
The pharma sector is clearly still wait and watch of the US tariffs. The US tariffs actually in the case of pharmaceuticals there is one rate for the branded drugs and one rate for the non-branded, generics, and the non-branded is where largely India belongs.
So, there the tariffs are likely to be much lower, but even assuming that there are a 10% tariff that we have in any case, that is largely baked into the numbers and so if that is the number that it turns out with the trade talks, pharma as a sector, companies like Sun they will show that 10% types of growth, they are positioned and the valuations are not heated, so whether it is Sun or Cipla, or Lupin all these companies are positioned for about like a 15-20% upside.
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However, in June, we had numbers before us like 3.2 per cent in April. It has gone down even further in May. Looking ahead, the outlook seemed to be quite comfortable and benign because of the expectation of a better-than-normal monsoon, the declining prices of crude oil, and the softening of the US dollar. It was in that context and keeping in mind the continued concern about tariff-related uncertainties –the external economic environment had become very uncertain and volatile, with International Monetary Funds and Organisation for Economic Co-operation and Development downgrading the outlook very significantly, and World Trade Organization (WTO) projecting -1.5 per cent growth in world trade – and the need to support growth and the continued concerns about urban consumption and private investment not picking up that we cut the repo rate by 50 bps. 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And inflation targeting requires action when inflation is high. Even till October 2024, when the MPC was reconstituted, inflation was quite high around 6 per cent. The RBI's action also needs to be seen in the context of growth. We ended 2023-24 with a very robust 9.2 per cent growth. Growth was much less of a worry at that time. Yes, 7.4 per cent was a pleasant surprise and showed some kind of revival. However, it was not a broad-based revival; it was driven by rural consumption and government capex towards the end of the financial year. Because it was not broad-based and the external environment is becoming more challenging and uncertain – Liberation Day was in April – this is the time when you need to build policy actions which will protect the growth sentiment and build momentum. The change in the stance to neutral caught everyone off-guard, with the MPC saying there is very limited space to support growth going forward. Should we rule out rate cuts now? The way inflation outlook is shaping will determine the future course of action. The RBI Governor, in a recent interview, has clarified that. It depends upon what kind of inflation you have because you need to have a certain real rate of interest. If that becomes negative, then savings will not be incentivised. Assuming that 1.5 per cent is the real rate of interest you want to preserve, then the floor (for repo rate) with inflation rate would be 5.5 per cent. However, if inflation goes to 3 per cent, then you have additional room to manoeuvre. Therefore, it really depends on the dynamics of the inflation and growth numbers. I wouldn't say that. Strictly speaking, the stance is not within the purview of the MPC. But we, of course, make some observations. I think it was purely the fact that with the 50 bps rate cut, the room (to cut further) going forward is limited. In view of that, it was a step to manage expectations. The uncertainty surrounding us is another factor to keep the stance neutral, which gives you more freedom to go either way. Although the inflation numbers up to May are looking very good, with oil prices shooting up due to the Israel-Iran conflict, you never know what is in store. So, a neutral stance allows you freedom to adjust your actions. Since the MPC's decision on June 6, a lot has changed. We live in a very dynamic world, and that is why we need to be cautious. When circumstances are uncertain and you want to promote growth, you try to reduce the cost of capital to make it easier for the entrepreneur who is sitting on the fence on whether to invest or not. That is what it does at the margin. Ultimately, investment decisions are a very complex process. But the cost of capital is one of the factors which is weighed by the entrepreneur, and policymakers try to assist the process. By lowering the cost of capital and trying to push demand, you are creating more favourable conditions for an investment decision than before. As I said, making an investment decision is a very complex process and cost of capital is only one of the factors. You can only exercise the levers which are within your control. You can't really do much about global uncertainty. What Mr Trump does on a day-to-day basis is something you have no control over. But holding other things constant, these (such as lowering the cost of capital) are some of the things which we can do something about. The other could be a fiscal stimulus which may be helpful to revive demand. The government has budgeted for a very substantial capex. So, frontloading the capex to keep the momentum up while things settle down in the international market could be another thing that could be done. Well, they are reacting to the changed times. We are now in a situation where the multilateral framework for trade has been completely put aside. MFN (Most Favoured Nation) – which has been the bedrock of multilateralism – has also been thrown out the window because Mr. Trump has X rate for China, Y rate for India, Z rate for Europe. The dispute settlement mechanism of WTO has been abandoned for some time because the Appellate Body was not renewed. In normal times, you don't have that urgency and you negotiate in a very relaxed manner. But when you need to, you find ways to expedite the process. That is what is happening. There is a realisation that we need to seize the moment and close these deals quickly before the damage is done, to protect and preserve our economic interests in the best possible manner. Sooner we do that, the better it is. Then the uncertainty that is prevailing is cleared. Yes, some of these are the early harvest type of arrangements, and they will continue to be negotiated. But normally in trade negotiations, you know what you can do for a large part of the agenda and only a small part, maybe 10-20 per cent, holds up progress. So, the best way forward is to move ahead with the part of the agenda on which you have no issues and find ways to address the red lines. Siddharth Upasani is a Deputy Associate Editor with The Indian Express. He reports primarily on data and the economy, looking for trends and changes in the former which paint a picture of the latter. Before The Indian Express, he worked at Moneycontrol and financial newswire Informist (previously called Cogencis). Outside of work, sports, fantasy football, and graphic novels keep him busy. ... Read More
